July | August 2017







States Move to Regulate, Ban Daily Fantasy Sports Industry

by Lisa McKinney, CSG Communications Associate
If you’re a sports fan, you’ve probably seen those ubiquitous advertisements for daily fantasy sports websites ramp up with Super Bowl 50 fast approaching. As these websites’ popularity surges, state officials have to contend with the uncharted legal territory that surrounds their operations.
Like traditional fantasy sports contests, daily fantasy sports websites allow players to create fantasy teams made up of professional or collegiate athletes, and earn points and win money based on the real-world performance of those athletes. Unlike traditional fantasy sports, competitions are held on a daily or weekly basis rather than over the course of a season. Players pay an entry fee in order to participate, which funds prizes and creates revenue for daily fantasy sports companies.
In October, regulators in Nevada ruled that fantasy sports websites constitute gambling and ordered them to stop operating in the state without gambling licenses.
New York Attorney General Eric Schneiderman filed a lawsuit in December to shut down daily fantasy sports websites in the state. The battle went before a judge on Dec. 11, who found in favor of the attorney general’s call to ban the websites. However, an appeals court ruled daily fantasy sports could operate there pending a trial.
In a Nov. 10 letter to daily fantasy sports company DraftKings, Schneiderman drew a distinction between daily fantasy sports and traditional fantasy sports that have been popular for more than 30 years, stating, “They play for bragging rights or side wagers, and the Internet sites that host traditional fantasy sports receive most of their revenue from administrative fees and advertising, rather than profiting principally from gambling.”
Illinois Attorney General Lisa Madigan said in December that fantasy sports betting amounts to illegal gambling in that state. FanDuel and DraftKings, the two dominant daily fantasy sports companies, separately sued her over her opinion letter. Texas’ attorney general also stated that daily fantasy sports equals illegal gambling because the companies take a portion of the bets as revenue.
Some states are looking to regulate, rather than ban, the industry. California Assembly Bill 1437, which would authorize companies in the state to offer Internet fantasy sports after obtaining licenses from the California Department of Justice, passed a committee vote Jan. 6. Massachusetts Attorney General Maura Healey proposed regulations that would prohibit anyone under 21 from participating and ban betting on college sports, among other rules. Healy filed the regulations with the Secretary of State’s Office in November. Members of the public were given until Jan. 22 to submit comments.
There are two avenues in which daily fantasy sports companies could pursue their attempts to continue operating in states that have moved to regulate them or shut them down, according to Marc Edelman, associate professor of law at the Zicklin School of Business, Baruch College, City University of New York. The first is through litigation; the second is through legislative change.
“They could take the conservative approach of ceasing to operate in those states and seeking a declarative judgment that they are legal,” he said. “Or they could continue to operate and attempt to defend their operation on their merits. Should they lose in court while operating, that would constitute ongoing illegal activities.”
In most states, the questions around daily fantasy sports’ legality center on whether they are games of chance or games of skill. Generally, games with an element of chance are considered gambling, while games of skill are not. But different states are likely to come to different conclusions about how these websites should be able to operate in their states, or whether they should be allowed to operate at all, based on their existing gaming laws.
“The definition of chance varies by state,” said Edelman. Also, some state laws allow games that depend more on skill than chance while others ban games in which chance has any influence on the outcome.
FanDuel and DraftKings say their contests are based on skill—performance is determined by how much a user knows about the athletes and sport around which the user is building a fantasy team. Critics say the contests are gambling because there is luck involved—things like weather or athlete injuries or suspensions can affect the outcomes of games and thus the outcome of fantasy sports competitions. Ultimately, the outcome is in the hands of the athletes, not the daily fantasy sports players.
Some critics also contend that the shaky legal ground on which daily fantasy sports websites are built is the reason start-ups like FanDuel and DraftKings were able to become so successful, so quickly.
“The reality is if there was no risk involved FanDuel would have never gotten off the ground,” said Edelman. “The market was perceived as too risky by big players such as ESPN, which is why there was no competition. The statements (from daily fantasy sports companies) denying any risk are disingenuous. The climate has proven much less favorable in the last couple months, at least more risky than investors may have expected.”
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